UK Finance Minister Faces Drug Allegations

UK Finance Minister George Osborne faced controversy Monday as allegations resurfaced about him taking cocaine with a former madam.

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Chancellor of the Exchequer George Osborne holds Disraeli's original budget box as he leaves 11 Downing Street for Parliament.

Natalie Rowe gave an interview to Australian channel ABC1 in which she says that she saw Osborne taking cocaine in 1994, when he was in his early twenties.

"I said to George jokingly that when you're prime minister one day I'll have all the dirty goods on you," Rowe claimed in the interview. "And he laughed and took a big fat line of cocaine."

She also said that their relationship became "more than" friendship.

Osborne's office did not return calls from CNBC.com asking for comment on the allegations.

The allegations resurface at a time when the Conservative government in the UK is already coming under criticism for therelationship between the News of the World newspaper and several politicians, including Prime Minister David Cameron, in the wake of charges that the newspaper illegally hacked the phones of celebrities, politicians, victims of terrorist attacks and dead British soldiers, among others.

Some of the allegations leveled at Osborne were published in the News of the World in 2005, while Andy Coulson, who later became Cameron's director of communications, was editing the tabloid.

Coulson quit Downing Street earlier this year after new allegations emerged of phone-hacking during his time at the News of the World.

Rebekah Brooks, former chief executive of News International, the division of News Corp which owned the tabloid, said during testimony to a parliamentary committee earlier this year that it is a "matter of public knowledge that George Osborne had the idea" to recruit Coulson.

Rupert Murdoch, founder, chairman and chief executive of News Corp, had to appear in front of a UK parliament committee alongside son James to answer questions about the hacking scandal.

Rowe, who has a child with a friend of Osborne's, William Sinclair, said that she was one of the victims of phone-hacking by the News of the World.

She had been in negotiations with the tabloid to sell her story, but eventually sold it to the rival Sunday Mirror. However, her story appeared in the News of the World on the same day as the Sunday Mirror.

The News of the World ran an editorial piece on the story which said that Osborne "was a young man when he found himself caught up in this murky world." The article also said that he "robustly condemns drugs for the destruction they wreak."

Rowe, who has alleged that the News of the World learned she was publishing her story by hacking into her voicemail, has hired Mark Lewis, a lawyer working on behalf of many of the alleged phone-hacking victims, and is seeking compensation from News International, owned by Murdoch's media empire, News Corp.

Lewis's other clients include the family of Milly Dowler, the murdered schoolgirl whose case sparked a fresh wave of phone-hacking claims that led to the News of the World being permanently closed this summer.

When the alleged details of the Osborne story first surfaced, in 2005, Osborne confirmed knowing Rowe, who ran an escort agency called Black Beauties, but said that allegations that he took cocaine with her were "defamatory and completely untrue."

He said: "Twelve years ago a friend of mine went out with a woman called Natalie and they had a child together. I met them together occasionally in the autumn of 1993, and it soon became clear that my friend had started to use drugs. He became more and more addicted and I saw his life fall apart. I tried to persuade him to seek treatment. Eventually he did ... That is, and always has been, the sum total of my connection with this woman."